The Insurance Information Institute (Triple-I) has released an Issues Brief that addresses misconceptions about risk-based pricing in property and casualty insurance and cautions against government intervention that could impact consumers.
Risk-based pricing is a core insurance principle that involves offering different prices for the same coverage based on risk factors unique to each customer, vehicle, or property. This method allows insurers to provide the lowest possible premiums to policyholders with favorable risk profiles while maintaining sufficient resources to pay claims for all customers.
Sean Kevelighan (pictured above), CEO of Triple-I, said, "Without risk-based pricing, lower-risk consumers would end up subsidizing riskier ones." He noted that this would lead insurers to "overcharge some customers and undercharge others, putting the companies’ financial stability – and their ability to pay claims – at risk."
The report notes that confusion can arise when actuarially sound rating factors overlap with other characteristics, which some critics view as unfair. There have been concerns about the use of credit-based insurance scores, location, and other individual risk factors in setting premiums. Triple-I's analysis points to data supporting the use of these factors.
According to National Association of Insurance Commissioners data cited in the brief, drivers with the lowest 10% of insurance scores have twice as many collision claims as those with the highest 10%. The report states that such factors help insurers align pricing with risk, ensuring premiums remain fair and sustainable for all policyholders.
The insurance sector is also experiencing a lag between technological advances and regulatory approval, which is slowing the adoption of real-time, hyper-personalized risk pricing. Industry leaders have noted that while insurers have the data and methodology to tailor pricing to individual behaviors and lifestyle choices, regulatory processes have not kept pace, making it difficult to reflect changes in risk in real time.
The industry is also reevaluating catastrophe models as weather patterns become more volatile and losses exceed historical norms. Insurers are integrating traditional models with new data-driven strategies to improve risk assessment and pricing accuracy.
At the same time, the growing use of algorithms and large datasets in underwriting has raised concerns about potential unintended discriminatory outcomes. This trend has led to calls for increased transparency in how insurers use data and develop pricing models.
The Issues Brief also highlights the impact of climate-related risks and inflation on insurance pricing. Regions previously less exposed to wildfires and hurricane-related flooding are now experiencing more frequent and severe natural disasters. At the same time, population growth in coastal and wildland urban interface areas is increasing exposure.
"Insurance pricing must reflect these increased risks to maintain policyholder surplus – the funds regulators require insurers to keep on hand to pay claims," said Patrick Schmid, Ph.D., chief insurance officer at Triple-I.
Schmid also noted that rising material and labor costs are contributing to premium increases, and if rates do not reflect these costs, insurers could face depleted surpluses and potential insolvency.
Triple-I’s brief calls for collaboration among insurers, governments, and other stakeholders to address affordability challenges. The report recommends modernizing building codes, incorporating resilience into infrastructure investments, and incentivizing homeowners to invest in mitigation measures.
“Strong building codes and proactive mitigation are critical to protecting communities and keeping insurance affordable," Kevelighan said. "These measures help insurers remain financially strong so they can pay claims when disasters strike.”
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